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How Texas Roadhouse Is Thwarting the Weak Trends in Fast Casual

In this Market Foolery segment, host Mac Greer, David Kretzmann of Supernova and Rule Breakers, and Ron Gross of Motley Fool Total Income find a happy story in a troubled segment of the restaurant industry. While quick-serve and fine dining have been recovering, fast casual, by and large, has not. So what are the secrets of success for this mass-market steakhouse?

A full transcript follows the video.

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Mac Greer: Shares of Texas Roadhouse(NASDAQ: TXRH) bucking the trend. Up on Tuesday on better-than-expected earnings. Ron, I hear all about how fast-casual is dying. It's been tough for restaurants. Texas Roadhouse is not getting the memo. What's going on?

Ron Gross: [laughs] No, they're doing a great job. Them and our favorite man-behind-the-glass restaurant, Olive Garden, another good example of a company that is bucking the trend. Quick service is relatively strong, and fine dining is actually holding on. But as you say, casual dining, really not doing well. But here you go, Texas Roadhouse, really nice numbers. They posted 4% comp sales. Margins were down a bit, largely as a result of wage inflation. But they did benefit from some lower food costs, which helped to offset that margin pressure a little bit.

But EPS are up 11%. They're opening up new restaurants, especially in the Bubba's 33 concept. I must admit I've never been to a Bubba's 33. There aren't that many of them yet. But they're certainly investing in them. They continue to put up good results. They carried through the momentum from Q1. I think there were some doubts about whether that momentum would continue. Good for them.

David Kretzmann: Yeah. What's interesting, too, is that their comps were up 4% this quarter, and they mentioned that for the first four weeks of the third quarter, those comps were up even more at 4.6%. So they're maintaining that momentum with same-store-sales growth, which is really impressive when you have such strong headwinds, especially in the casual-dining segment of the overall restaurant space.

Greer: Guys, at the recent Motley Fool member event, the CEO and founder of Texas Roadhouse, Kent Taylor, spoke. At least, speaking for me, he's an incredibly charismatic, winning guy. He's a guy that you root for. And his definition of Texas Roadhouse was "a redneck Outback Steakhouse."

Kretzmann: That's the secret sauce, huh?

Greer: That's the secret sauce, apparently.

Gross: I must admit, I went to look at the menu before we stepped into the studio here, and I was like, mmm, that looks good.

Greer: It looks great. And he talks about how the quality of the food, and their steaks are cut in-house, so, really placing a premium on homemade food and the customer experience. Later in that same interview, he said they hire happy people -- the idea that if you hire happy people, obviously that's infectious, and your customers are going to be much happier. So, really interesting, all the different ways that he emphasized the consumer experience.

Kretzmann: And talking about the menu, what's especially impressive is, when you go back five or 10 years, the menu probably doesn't look all that different than it does today. They don't have these one-off offerings, half off for a certain menu item. They don't have these specialty menu items in the stores for three months to try to drive traffic. They're very consistent with their offerings. They don't try to discount. This quarter, they did bring a couple new menu items onto the menu, but it was really just smaller portion sizes for two entrees. In general, they focus on the basics with the menu, they keep it very consistent, and they manage to keep customers coming back, which really is kind of a contrarian strategy compared to what a lot of other casual diners do.

Gross: Yeah. I think they get some of that menu diversification through the Bubba 33 segment, which is really a pizza, burger, beer kind of place. In fact, that might even be the slogan; don't quote me. But it has a different menu, which gives them that nice, broad diversification.

David Kretzmann owns shares of Texas Roadhouse. Mac Greer has no position in any stocks mentioned. Ron Gross has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Texas Roadhouse. The Motley Fool has a disclosure policy.